Advice needed on how to account for differed Cap-Ex in offer

4 Replies

So I have been analyzing an opportunity to purchase a property with 33 units. After doing the Preliminary evaluation of expenses and revenue we come to the conclusion of what we believe the property is worth on paper. In our calculations, we have good margins for maintenance expenses as well as building reserves for Cap-Ex, which are based on the seller's numbers and our experience with some smaller multi-family properties we currently own.  In looking at the current rent roll it does appear there's opportunity in bringing rents to current market value. We believe we can accomplish that through some upgrades to the property and have been successful in the past through good management of properties.  there also may be some opportunity to reduce utility expenses. 

The owner claims to have done some recent capital expenditures over the past year but with a quick drive-by of the property, not even going into Official due diligence, it is evident that the 5 building property will need some immediate attention to the exterior. Paint, blacktop, roofs, and landscape to name a few. My question would be, if the numbers support a $1M purchase price and there is conservative $100K worth of deferred capital expenditures, do you write your letter of intent for $900K? Thanks in advance for your input.

@Mike Montana it depends.

Depending on your market, some assets will trade as is and it is normal and expected that a Buyer will build in dollars in their own capital stack for deferred maintenance. 

Besides significant items, as an example structural, you would reduce your purchase price. 

The other option is after your inspection and deferred items are known, you can go back to the Seller and ask for a repair credit. This approach is fine and I have done it. 

If you do this often though you can get a reputation as a "re-trader". Some brokers don't want to work with re-traders as they are always negotiating, re-negotiating and re-negotiating the contract and over time it can be a frustrating experience.

Brokers and Sellers like deals that go smoothly and easy. 

Thanks @Brian Adams. That is helpful information. Good to know about not building a reputation as one who continually "re-trades".

@Mike Montana It really depends on your market. In some markets you could drop the $100K PLUS some extra to compensate you for the headache and effort it'll take yo complete the repairs. In other markets, there will be multiple offers exceeding $1.2M for the $1M property you describe...

At the end of the day, prices are set by how much buyers are willing to pay. 

My advice to you: stick to your numbers and font get sucked into a bidding war!

Make an offer that you feel comfortable making after taking into consideration everything you will need to do/invest post closing. 

As for re-trading, the reason brokers don't like it is because it reduces the chances of a deal closing. Any new friction introduced during the deal is a risk for them. 

This is something I call "The fat cat syndrome". In this seller's market, brokers can afford "not wanting to work with re-traders". They forget the real estate market has a cycle and when it will turn, all those "re-traders" will remember the way these brokers conducted their business...

@Joseph Gozlan Thank you for the input. Very true that the price is certainly based on what buyers will pay. Great advice on sticking to my numbers. I will most definitely stick by my financial analysis and not get emotionally involved in any property. At the end of the day it's a business decision correct.